life insurance

DEFINITION: “Insurance,” by definition, is an agreement or contract between a provider (“insurer”) and a purchaser (“policy owner”), in which the insurer promises to indemnify the policy owner, partially or wholly, in case some good or property belonging to the policy owner is accidentally harmed or destroyed.

An insurance contract is referred to as a “policy.” The policy specifies the parties to the contract, the property indemnified, the amount of the indemnification, and the precise conditions that must be fulfilled in order for indemnification to occur.

“Life insurance” is a type of insurance in which the “good” indemnified is the life of the policy owner.

By its nature, life insurance necessarily involves a third party, called the “beneficiary,” who is appointed by the policy owner to receive the indemnification upon the latter’s death.

ETYMOLOGY: The word “life” derives from the Middle English word lif, and the Old English word līf, both meaning “life.” The Old English noun līf is connected to the verb libban, meaning “to live,” which in turn is related to the Old High German verb leben, with the same meaning.

The word “insurance” derives from the Middle English verb insuren, meaning “to insure,” which is probably an alternative form of the verb assuren, meaning “to assure.” Assuren, in turn, derives, via the Middle French verb assurer, from the Medieval Latin verb assecurare. The word assecurare is composed of the classical Latin preposition ad, meaning “towards,” “at,” “on,” or “according to,” and the adjective, sēcūrus, meaning “free from care,” “safe,” or “secure.”

USAGE: Life insurance shares some of its technical terms with other forms of insurance.

We have already mentioned the terms “policy” and “beneficiary.” Another such term is “premium,” which is a payment made according to the terms of an insurance policy by the policy owner to the insurer that is made in a pre-established amount according to a pre-established schedule.

A term that is unique to life insurance is “underwriting,” which is the process by which an insurer determines whether a policy on a certain person’s life shall be issued, and if so, at what price and under what conditions.

The main conditions that the prospective policy owner is usually required to satisfy are minimal conditions pertaining to the state of his health. A person meeting such conditions is said to be “insurable.”

Life insurance policies are offered on the market in a variety of forms, but the following distinction is fundamental:

  • Protection policies: Also known as “term life,” this is the simplest form of life insurance and the one most similar to other forms of insurance, such as fire insurance. Term life policies are in force for a set period of time and specify dollar amounts for the monthly premium and the benefit amount payable to the beneficiary in the event of the policy owner’s death. Term life policies do not accumulate any cash value.
  • Investment policies: The best-known variant of this form of life insurance is “whole life.” Like term life policies, whole life policies also specify dollar amounts for the monthly premium and the benefit amount payable to the beneficiary in the event of the policy owner’s death. However, they are in force for the life of the policy owner, however long that may be. In addition, whole life policies accumulate a cash “endowment” amount that may be distributed to the policy owner during his lifetime.

Benefit payments from either form of life insurance policy may be taken by the beneficiary either as a lump sum or as an annuity—which is paid in regular installments for either a specified period or for the life of the beneficiary.

There are several other types of life insurance policies, but they are basically variants on these two themes.